"Top earner," in this case, means anyone making more than $350,000 with a bonus of more than $50,000 over a three year period. Financial advisers are not included in this directive, according to sources close to this situation.

Deferred compensation (and bonuses paid in stock rather than cash) have been increasingly popular among bulge bracket Wall Street banks seeking pennies to pinch in a post financial crisis world.

All that aside, this news has to be killer for morale at Morgan Stanley. Yesterday the bank proceeded to layoff 1600 people.

While this is tough, though, it's not surprising. Back in October, Morgan Stanley CEO James Gorman said that Wall Street is full of "overpaid bankers." He put the bank's money where his mouth is too, and cut overall compensation by 9 percent from 2011 to 2012.

But apparently that's not enough. In fact, Dan Loeb, the billionaire hedge fund manager who revealed a long position in Morgan Stanley last week, criticized the firm's pay practices in an investor letter saying that director pay was too high for such a small, simple bank.

Mr. Loeb has indicated to people close to him that in some cases he feels the pay is appropriate, given the tricky balancing act needed to hold on to talented employees and placate restive shareholders while Mr. Gorman tries to rejuvenate the company.

Not to say that Gorman's compensation is safe from Loeb's scrutiny — according to the WSJ, it's not. Loeb does think that Ruth Porat, Morgan Stanley's CFO, is compensated fairly though.